Low-income Borrowers Not Getting Their Share

WASHINGTON — The nation`s two major suppliers of mortgage funds are devoting only about 20 percent of their business to low-income borrowers, not more than 30 percent, as federal regulators had thought.

A new analysis of mortgage lending underscores the gap in support for low-income housing, which comes as a surprise to federal officials in charge of regulating the two secondary market companies: the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp.

(Freddie Mac).

Members of Congress preparing oversight legislation of the federally chartered firms voiced concern about the funding discrepancy.

The secondary mortgage market companies do not lend directly to consumers, but buy mortgages from lenders and then hold them in their own portfolios or pool them into securities for resale to investors.

Since 1978, the federal government has required Fannie Mae, in keeping with its public purpose, to devote 30 percent of its business activity to the purchase of home loans made to borrowers earning at or below a community`s median income.

In addition, 30 percent of Fannie Mae`s loan purchases must support properties located in central city neighborhoods.

Freddie Mac, Fannie Mae`s main competitor, is expected to come under the same rules soon, once proposed federal regulations go into effect. Freddie Mac is not now required to meet the 30 percent figure but has in the past told the Department of Housing and Urban Development that it was devoting that much business toward lower-income housing.

But Home Mortgage Disclosure Act (HMDA) data released for the first time recently indicates that 19.1 percent of Fannie Mae`s 1990 business and 19.3 percent of Freddie Mac`s served borrowers with incomes below the median, according to the analysis by the Federal Reserve Board.

The value of the business represented by the 30 percent targets represents $115 billion between the two agencies over the next two years, according to an estimate by National People`s Action, a Chicago-based housing advocacy group.

``The twin 30 percent tests are both appropriate and vitally necessary for Freddie Mac and Fannie Mae to meet their public purpose,`` said Sen. Alan Dixon (D-Ill.), who is pushing to give the regulatory requirements the force of law.

As late as last spring, Fannie Mae was telling federal officials it exceeded the goal, with 34 percent of its loan purchases meeting the criteria. However, the company was measuring its compliance based on business involving loans on homes with prices 2.5 times the area median family income. That purchase price formula is a throwback to 1978 when HUD sanctioned its use because borrower income data was considered difficult to obtain.

Legislation now under consideration would require the companies to compile that information. But such a ``monumental task`` would take about two to three years to accomplish, predicted Jeanne Broyhill, Freddie Mac director of government and industry relations.

John C. Weicher, HUD assistant secretary for policy development and research, said the old formula used by Fannie Mae ``seemed like a reasonable proxy until we saw the actual data, but clearly it does not bear the relationship to income as well as we would like.``

Freddie Mac recently analyzed a sample of its 1989 mortgages and found that 18.8 percent of purchases involved borrowers with incomes below the median.

Fannie Mae has conducted a similar sample audit but is not releasing the results publicly, said Martin D. Levine, Fannie Mae`s vice president for low- and moderate-income housing. However, he said, the internal results ``are consistent`` with the 1990 HMDA figures showing 19 percent of Fannie Mae`s business going toward lower-income households.

Levine said Fannie Mae supports moving to an income-based assessment of its lower-income activities. But a Fannie Mae document calls the 30 percent goal ``arbitrary and unreasonably high.`` The 30 percent mark, according to the document, exceeds the mortgage demand among the targeted households. In 1989, only 24 percent of recent movers who owned a home had incomes below the median, according to Levine.

If Congress sets the goal higher than real demand, Fannie Mae could conceivably go to the extreme of holding back mortgage money for higher-income business to drive up the percentage of lower-income activity, Levine said.

Weicher, however, said he believes Fannie Mae should have little difficulty meeting the goal when its rental business is added. ``An awful lot of what is newly built in multifamily fits the low- and moderate-income categories,`` he said.

Freddie Mac, however, will find it difficult to close the 10 percent gap between its current 20 percent activity level and the 30 percent goal, Broyhill said, because it not doing any rental mortgage funding.

When Freddie Mac does re-enter the multifamily market midway through next year, ``we will not get a significant jump in business immediately,`` she said.

Although a 30 percent test for central city loan funding has also been on the books for years, HUD stopped requiring Fannie Mae to report its compliance early in the Reagan administration. However, HUD has proposed restarting disclosure of the data.

The congressional legislation under consideration also would make the geographical business goal mandatory.

Freddie Mac`s internal audit found that 21.6 percent of its loan activity was secured by central city properties.